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An empirical examination of shift‐share instruments
Author(s) -
Broxterman Daniel A.,
Larson William D.
Publication year - 2020
Publication title -
journal of regional science
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.171
H-Index - 79
eISSN - 1467-9787
pISSN - 0022-4146
DOI - 10.1111/jors.12481
Subject(s) - endogeneity , explanatory power , economics , econometrics , construct (python library) , relevance (law) , instrumental variable , macroeconomics , philosophy , epistemology , computer science , political science , law , programming language
Bartik's (1991, 1993) approach to identifying shocks in demand to regional economies has been used extensively for nearly 30 years. We chronicle the development of Bartik‐type shift‐share instruments and examine the empirical performance of alternative versions that use different combinations of national shift and local share variables in their construction. We offer three main findings. First, instruments constructed from shares that omit employment in nontraded sectors empirically dominate versions that include total employment. Second, industrial sectors with high average shares and low variation across areas are more likely to be nontraded and endogenous. This suggests placing large weights on nontraded sector shares worsens both relevance and potential endogeneity. Finally, we demonstrate national shifters other than employment, such as prices and wages, can be used to construct instruments with unique and relevant explanatory power.